How you choose to fund your website business acquisition could set you up for success or be a drag on your bottom line. While nearly half of business purchases are made in cash, looking to leverage your purchase with another funding source or two might give you a better return on your investment. Website businesses have unique characteristics that may appeal to investors as well as other lenders, particularly if they are high-margin or fast-growth opportunities. While cash is the most straightforward choice, it’s important to keep a few questions in mind when reviewing your options:
- How much cash can I set aside for a business purchase?
- How much debt am I comfortable taking on?
- How much free cash flow do I need the business to generate to cover my expenses and loan payments?
- Am I comfortable with an investor?
Depending on how you answered the questions above, some of the options below will appeal more to you than others.
Seller Financing: Sometimes sellers will allow buyers to finance a portion of the business purchase through the profits of the business over time. This can help close a deal more quickly, especially if you are not a good candidate for a traditional loan. The amount a seller will allow you to finance is usually not more than 60% of the purchase price. The length of the contract is often 5-7 years and can feature a balloon payment at the end. Of course, if other buyers are offering all cash, you will likely be at a disadvantage.
Home Equity Loan: If you have more than 20% equity in your primary residence, this could be a source to consider. You will want to allow a cushion in case your home’s value declines, but generally your interest rate will be competitive, if not better, than what traditional lending sources such as banks can offer. However, HELOC lenders will look at your credit score as well as your debt-to-income ratio before making a decision.
Traditional Bank Loan: If you are considering more traditional financing, you should speak with a local bank, credit union, or online bank. Getting financing for an existing business is often easier than for a startup, but it can still be challenging. An existing business will need a good track record of strong cash flows and assets. You’ll also need a very good personal credit score and may need to put down up to 30% of the purchase price in cash. A line of credit for your business is also a possibility, if you don’t need to finance the whole purchase and just need help managing the cash flow. You may be asked for a business valuation, a record of your business experience, and a business plan. Fundera, a small business loan comparison website, says a potential lender will want to see the following:
- Personal Finances:
- Personal credit score
- Business credit score (if you already own a business)
- Tax returns
- Cash flow statement
- Outstanding debts
- Finances of acquired business:
- Balance sheet
- Business tax returns
- Profit margin
SBA Loan: Some business sellers will advertise that their business is eligible for a Small Business Association (SBA) loan, meaning that the seller has pre-qualified the business for an acquisition loan. An SBA guarantee will get you a lower interest rate with a bank, because the government agency is shouldering some of the risk of the loan. If a business is not advertised as SBA qualified, you can still apply for one through an eligible lender. The SBA has high standards for qualifying a business and a purchaser, so while desirable, it is not easily obtained. Here is a summary of the main loan types:
- Standard 7(a): Up to $5 million, 5-10 business day turnaround, 75% guarantee for loans over $150,000, 85% guarantee under $150,000, up to 10-year line of revolving credit.
- Small Loan 7(a): Up to $350,000, 5-10 business day turnaround, 75% guarantee for loans over $150,000, 85% guarantee under $150,000.
- SBA Express: Up to $350,000, 36-hour turnaround, up to 50% guarantee, up to 7-year line of revolving credit.
401k Business Financing: This type of financing is known as ROBS, Rollover for Business Startups. Offered by Guidant Financial, it allows you to use your IRA or 401k assets to invest in a new business. Essentially, the retirement fund becomes an investor in your new enterprise by buying stock in a newly formed C Corp. You can then use that cash to help buy the business or manage your cash flow like a line of credit. You will need at least $50,000 in your retirement account to qualify. This type of financing is often used as a second or third tier when needed. The danger here is that if your business fails, your retirement savings will be jeopardized.
Investor Funding: This is a less conventional approach, but if you have a business partner, friend, or relative who knows you well, this may be a route to getting the money you need. Partners may want equity in the business, a share in the profits, or a simple monthly loan payment. Most small business investors opt for a debt payment setup, because there is less risk involved. If you have a fast-growing eCommerce business, then an investor may opt for an equity investment or convertible note that could convert to equity at some point instead of being paid back. This allows the investor to get an interest payment at a fixed rate for a fixed period and also enjoy the benefit of upside if the business does well.
Looking outside of your personal circle, the Small Business Investment Companies SBIC has a venture capital program consisting of equity and debt that includes SBA dollars along with private funds. The basics are:
- Debt: $250,000 to $10 million loans; 9% to 16% interest
- Equity: $100,000 to $5 million investments
- Debt with equity: $250,000 to $10 million; 10% to 14% interest
Whichever path you choose, make sure you have a written agreement and that you are comfortable with the terms. Having an attorney review it is always advisable.
Lastly, you will need some cash on hand to run the business and you want any loan payments to be manageable. Weighing the pros and cons of each option before moving forward on an acquisition will put you in a stronger position for the future. Owning a business can provide a nice income and lifestyle, but you have the best chance of success when you secure the right funding mix for your deal.